Last Updated on November 21, 2022
It’s a problem as old as manufacturing itself: making certain you have enough materials to consistently keep your production lines running. You can have a great product idea, the best people, the best manufacturing partner and the best equipment but without the materials to make it, your manufacturing project is over before it begins. The industry term for this balance is called “Inventory Management.”
This is the quandary that all manufacturers must face: you want to have lean manufacturing lines (over-ordering is also a trap many manufacturers fall into) but just how lean should it be? How do you strike that balance between a strong, lean supply chain and being dead in the water with no materials?
What is Inventory Management and Why is it Important?
According to www.business.org, inventory management is defined as the following:
“Inventory management is an overarching term that refers to your tracking system for every phase in the product life cycle. It can include your sales forecasting, product ordering, supply chain management, warehouse management, and customer fulfillment solutions.”
In short, Inventory Management is the art of balancing between being overstocked and stocked out. According to DSD Software, an inventory management software company:
“Why is inventory management in business important? Inventory management can make or break a business. Inventory is often the largest item in the current assets category on a balance sheet. Issues with inventory can contribute to business losses, even failures. Proper management of the supply chain, on the other hand, can allow a business to thrive. Good inventory management strikes a balance between the amount of inventory coming in and going out. It controls the timing and costs of non-capitalized assets and stock items, allowing a business to reach optimal profitability.”
According to Manuel Campos, Engineering and Information Systems Manager at NovaLink, another key question that needs to be asked of a production to maintain good inventory balance: how well do you understand your bill of materials and how do you handle the waste and the costs of newer materials?
“A common error is the belief that if I buy a thousand pieces of X components that it will translate into a thousand finished products. However, that’s not the case in most scenarios: there will be some waste that may be incurred by your suppliers or vendors, and some by process of execution which might be material related or even manpower related. Once we start touching the material for producing the product, new material needs to be applied in order to satisfy or guarantee a good quality product at the end of the line.”
It’s All About The Data: Setting an Inventory Ratio
Knowing what you have on hand (or don’t) and how much you may need to purchase to maintain viability in your production lines comes down to having solid and current data available. Data definition and data quality are big challenges for many manufacturing industries, often caused by lack of sound data management practices. For example, a company that has inaccurate procurement and manufacturing lead times will often be forced to rely on judgment-based inventory planning. This type of inaccurate planning can lead to excess ordering and stocking to meet customer service levels.
To prevent this, manufacturers should have sound data that will allow them to set an inventory ratio that helps to prevent overstocking and shortfall in the manufacturing goods. Inventory ratio refers to the number of times that a business turns over or depletes its inventory in a given year. What is a good inventory ratio for manufacturing? According to Chron:
“The inventory ratio for manufacturing typically ranges from 1 to 2 on a national scale. According to the Census Bureau, the inventory ratio in all manufacturing sectors ranged from 1.21 to 1.39 from 2000 to 2010. The turnover ratio in the durable goods sector ranged from 1.40 to 1.82, while the ratios were lower in the nondurable goods sector at 0.91 to 1.14. Therefore, manufacturers should expect to maintain ratios in these general ranges.”
Good Inventory Management Means Controlling the Costs of Your Manufacturing
Knowing what you have to keep your full service manufacturing sustainable, what is in your warehouse, and how to properly manage the supply chain is the base of any sound manufacturing operation. Sound Inventory management allows your company to have a better understanding of customer demand for your manufactured products so you never over-order or find your operation caught short. Inventory for your manufacturing is expensive to acquire, but with inventory management being done correctly, you can acquire inventory with the expectation of selling it for a profit.
Poor Inventory control means materials sitting unused in a warehouse, locking up its potential value. Unused inventory can mean working capital and cash flow issues as the product you anticipated being able to manufacture is not being turned into profit. Good inventory management helps to solve these critical problems.
Conclusion: Keeping the Line Running
Satisfactory inventory management not only means what you have (or don’t have ) at the moment your operation is running, it also refers to being able to predict when you will need more materials to keep your production line running. A poor tracking of your materials can mean that your production line comes to a crashing halt.
Manuel Campos of NovaLink elaborates:
“Another important thing to know (in manufacturing) is how do you plan to do your purchasing according to your manufacturing demands? If you are able to plan ahead for these questions and have the materials and availability in place, then starting production is actually the easiest part: we can then support you in preparing for available stock for keeping your line running. If that knowledge is not available, which usually gets done during the ramp up process, you may have the risk of having lines down because of lack of materials, or you have the risk of having a line down because of a product variation that was not considered at the very beginning of the planning phase.”
Supported by over 30 years of experience, NovaLink has provided shelter or contract manufacturing services to a variety of industries. Whether it is a product that requires precision and high tolerance, or a product that has been commoditized, NovaLink operates at an advantage.